SHOPKO’S VISION FOR THE FUTURE

Byline: Valerie Seckler

NEW YORK — ShopKo, the forward-looking regional discounter, is racking up double-digit sales and earnings gains at a time when some of its competitors are suffering heavy losses and others in the sector have gone bankrupt.
Venture Stores is still struggling to reposition from a discounter to a value-priced department store, even as it lost $48 million in 1996 after restructuring charges and its comparable-store sales slumped 20 percent.
Pamida Holdings lost $1.2 million last year as sales plunged 14 percent in heated price wars with Wal-Mart, Target and Kmart in the central U.S.
Northeastern discounters Bradlees and Caldor are bankrupt. And Hills is still seeking to return to profit since its change in control in June 1995.
Yet ShopKo Stores Inc., the 130-unit chain based in Green Bay, Wis., is thriving despite formidable competition from the big three national chains, as well as from Kohl’s, the mass-to-moderate hybrid.
It is doing so, according to top management, by remaking 90 percent of the chain into the Vision 2000 prototype since 1991, streamlining its logistical infrastructure, and harnessing its database to launch more precise and frequent targeted marketing efforts.
Meanwhile, talk has been circulating on Wall Street that ShopKo is continuing to look ahead, eyeing Hills Stores Co., the 155-unit Canton, Mass.-based discounter, as a possible takeover target. Officials at both firms have declined to comment on the rumor. Asked about the rumor, Dale Kramer, president and chief executive officer of ShopKo, would say only that “We continue to research other growth plans, along with developing an exit strategy for SuperValu.” SuperValu, based in Tacoma, Wash., operates combination food and discount stores, as well as offering distribution services in the United States and export services for American firms.
Some analysts, including Van Cleave, speculated that ShopKo itself may buy out SuperValu’s stake in the discounter. “SuperValu owns 46 percent of ShopKo, and they’ve indicated they still want to liquefy their stake, but the mechanics are uncertain,” said Van Cleave. “ShopKo’s finances now are such that they could buy out SuperValu themselves.” For the year ended Feb. 22, ShopKo’s cash position ballooned 39 percent to $124.6 million from $89.5 million.
“However, ShopKo also has indicated they want to grow both the discount chain and the $500-million health services business, so they may want to put their cash to other purposes,” Van Cleave added.
In a telephone interview this month, Kramer said, “We’ve developed a plan to do a better job of growing sales in a smaller box. We’ve brought a lifestyle focus to merchandising categories we believe we excel in.” Those areas, he said, are casual apparel, special sizes, basics, bed and bath, housewares, casual furniture such as unfinished bookshelves, and health care services.
To accommodate the new approach, said Jeffrey Jones, senior vice president and chief financial officer, “ShopKo walked away from about $200 million in annual business while reallocating real estate in our Vision 2000 format.”
In the prototype, which has been rolled out to all but a dozen of ShopKo’s stores, traditional discount items including hardware, appliances and sporting goods have been eliminated or pruned sharply.
As a result, the cfo said annual sales productivity leaped 15 percent in the redone units, even as inventories were slashed by 20 percent. Jones noted ShopKo is on track to remodel the 12 stores still in old formats by 2000, if not sooner.
After abandoning career dresses and strengthening casual women’s apparel in the remodeled units, ShopKo has seen annual sales of activewear soar 62 percent, casual knit tops surge 48 percent, plus-size sportswear grow 16 percent and intimate apparel run up 11 percent.
Company executives and observers said ShopKo unleashed its potential with the implementation of the Vision 2000 prototype, which also features updated pharmacies and optical areas. The format ranges from 75,000 to 125,000 square feet versus older units that occupied 85,000-to-90,000-square-foot boxes.
“They drew more traffic into their stores with the pharmacies, and those customers have responded to the beefed-up soft goods assortments,” said Margaret Cannella, credit analyst at Citicorp Securities. “It’s a very effective format, and their execution has been extraordinary.
“It’s similar to the way Target has competed successfully against Wal-Mart and Kmart,” Cannella added, referring to the Dayton Hudson discount division’s emphasis on apparel and soft home goods.
Cannella’s mention of execution was ironic considering that Kramer likens ShopKo’s approach to that of Kohl’s — known for pinpoint execution. But Kramer acknowledges that ShopKo is “a notch below Kohl’s price-wise.”
According to Kramer, “ShopKo differentiates from low-end chains like Wal-Mart by offering better-quality goods at value prices, as well as with our ProVantage Health Services, our retail pharmacy and optical businesses.”
The ShopKo ceo said the chain of discount stores in 15 Midwestern and Pacific Northwestern states is the nation’s ninth-largest optical retailer, which helps draw traffic into other parts of the store. He further estimated that ShopKo’s pharmacy counters process 10 million prescriptions a year, or roughly 60 percent more than the average drugstore.
Another reason ShopKo has performed in the Midwest is that it has been doing battle with Wal-Mart, Kmart and Target for a longer time than regional chains in other parts of the country, observed Jay Van Cleave, retail analyst at Robert Baird & Co., a Milwaukee-based brokerage. “ShopKo did a good job developing a new store format when they saw that the competition from Wal-Mart, Target and Kmart would intensify,” Van Cleave said. “They have remodeled almost all of their stores over the last five years.”
In contrast, Northeastern chains like Bradlees and Caldor’s — both reorganizing under Chapter 11 bankruptcy protection — have yet to face Target stores in New England. Only this past winter did Target enter the New York metropolitan area, opening a store in Edison, N.J., in March.
Further enhancing ShopKo’s competitiveness, said Kramer, has been the upgrading of its merchandising-analysis technology. “We are able to more accurately correlate the prices and margins of individual transactions and to match ad promotions with store transactions,” the ceo said. “We’re using the data to plan targeted promotions, manage shelf space more effectively and solidify partnerships with vendors by sharing the information.”
Earlier this month, ShopKo topped Wall Street estimates that it would net 71 cents a share in the fourth quarter, reporting earnings leaped 15.5 percent to $24.3 million, or 76 cents a share. Sales for the quarter ended Feb. 22 jumped 27 percent to $632.8 million.
At the same time, ShopKo said it will take a first-quarter charge of about $1.6 million to $2 million after taxes, to cover costs associated with the April 2 termination of a planned merger with Youngston, Ohio-based Phar-Mor Inc.
In September, Phar-Mor and ShopKo had agreed to merge in a complex deal valued at up to $579.6 million, but the companies later cited “continuing uncertainties in consummating the transaction.” They also noted the impact of the significant decline in Phar-Mor’s stock price since the planned merger was announced and that Phar-Mor’s largest shareholder, Hamilton Morgan LLC, never OK’d the deal.
In the wake of the merger’s termination, Moody’s Investors Service said it is reviewing ShopKo’s Baa2 senior unsecured debt rating for possible downgrade. Moody’s also is keeping Phar-Mor’s ratings on watch and changed the direction to “uncertain” from “positive.”
In 1996, ShopKo’s profit shot up 17 percent to $44.9 million, or $1.40 a share, from $38.4 million, or $1.20 a share. Sales grew 18.6 percent to $2.3 billion from $2 billion. Comps, including double-digit gains in the back-to-school and winter holiday periods, rose 5.9 percent versus a year-ago drop of 0.2 percent.
Thomas Tashjian, retail analyst at Montgomery Securities, forecast ShopKo will boost its bottom line this year by 14.3 percent to $1.60 a share, and tack on another 12.5 percent in 1998 to net $1.80.
“Our use of TV commercials as well as print ads raises ShopKo’s profile,” Kramer said, summarizing a few critical elements of the chain’s success. “With the volume we’ve built through our pharmacy and optical services and the upgrading of our systems to bring them into the Nineties, we believe ShopKo’s marketing and merchandising capabilities are comparable to those of the national chains.”

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